Insurers in Australia and New Zealand are adjusting to higher net retentions as reinsurers continue to move away from frequency risk amid consecutive years of heavy major catastrophe losses in the region. But despite the headwinds and increased demand for protection, capacity was stable and sufficient thanks to the support of the Australian Cyclone Reinsurance Pool, reports Aon.
The Australia and New Zealand mid-year reinsurance renewal “was orderly, albeit late,” explains re/insurance broker Aon in its mid-year report.
July 1st is a key renewal period for the region as more than 75% of the annual property catastrophe reinsurance limit renews. The 2023 mid-year renewal followed four years of major catastrophe losses in the region, which includes the record-breaking USD 6 billion load from the flooding events in Australia in 2022, as well as extreme events in New Zealand this year.
As a result of the loss experience in the region, reinsurers reassessed catastrophe pricing and their eagerness to move away from frequency events and less well-modelled perils, such as floods, hail and wildfires, persisted, leading to higher net retentions for buyers.
Aon notes that this trend saw return periods of attachment rise from one-in-three year to around one-in-six year levels, and also caused insurers to intensify portfolio optimization efforts and explore opportunities for capital relief.
“Insurers are now adjusting to life with higher net retentions and increased earnings volatility, which is likely to prove particularly challenging for the region’s insurers. Small and regional insurers in Australia and New Zealand, which typically rely more heavily on reinsurance to meet regulatory capital requirements, have been hit hardest by changes in the reinsurance market,” says Aon. “Increased retention levels will see many regional insurers now run with a lower regulatory Prescribed Capital multiple, although there are some options to optimize portfolios and capital.”
The higher cost of reinsurance, notably for cat-exposed lines, and the uplift in retentions, is occurring alongside increased demand for protection in the region, and while capacity was “stable and “sufficient” to meet demand, Aon reports that buyers were unable to purchase protection at desired attachment levels.
“Notably, capacity for the lower levels of programs at the 2023 renewal was not available at any price, a change on the mid-year 2022 when reinsurance for lower layers was still available albeit at increased rates-on-line,” reads the report.
One factor that did benefit insurers and the market at the mid-year renewals was the Australian Cyclone Reinsurance Pool, which is backed by an AUD 10 billion federal government guarantee, and provides cyclone and related flood damage reinsurance protection for homeowner and small business property insurance. It’s expected that the pool will take on over 90% of the market’s cyclone risk.
The capacity available through the ACRP eased the supply-demand balance, resulting in the market purchasing 10-15% less catastrophe limit at the mid-year than in 2022.
All in all, Aon reports catastrophe rate increases in the double-digits at the mid-year renewal in Australia and New Zealand, on top of similar increases at the mid-year renewals in 2022.
Source: reinsurancene.ws
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